This note was originally published at 8am on January 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“If we had 8% unemployment, Keynes would be back. We must remember that economists are not necessarily the creatures of great thought but of circumstance. Keynes would not have written ‘The General Theory’ except in the Great Depression.”
-John Kenneth Galbraith, 1999
Today’s quote of the day is typical of Galbraith; he expressed his views with a masterful economy of language. Ten years after Galbraith made his prediction that Keynes would be back in vogue if unemployment reached 8%, his prophecy came true. Robert Skidelsky began writing “Keynes: Return of the Master” – on January 1st, 1999 – as unemployment was just under 8% and trending higher. The Wall Street Journal also devoted a full-page spread to Keynes a week after Skidelsky put pen to paper.
It’s difficult to understand the motivations of academic economists. The measure of success for an economist, some might argue, is whether or not one’s theory stands the test of time and remains part of future policy debates. The difficulty with this, as Skidelsky highlights, is that circumstances may permit your ideas to be heard outside of academia but they will almost certainly demand that theories will, as policies, be applied in a vulgarized form. The discrediting of economists in recent times has prompted many public figures to disavow all ties with the profession; Tim Geithner is just one example.
Despite the provocative title of his aforementioned book, Skidelsky is realistic and honest about the role of circumstance in the ascension of Keynes and others to the throne of economics that some would place them on, stating that “just as Keynes succeeded politically because unemployment was the problem of the 1930s, Friedman succeeded politically because inflation was the problem of the 1970s.” The rise of Barrack Obama and, perhaps, the ever-perseverant Mitt Romney are also permitted more by the fickle preferences of their time than the genius of their ideas. Thankfully, politicians and the policies they implement are answerable to voters. One long term positive emerging in the United States is what could be called the bottoming process of political participation in this country. Obama’s engagement of the youth vote through social media was a political revelation of a scale not seen since Reagan went public with his appeal for voters to contact their state representatives to support Federal Tax Reduction Legislation in July 1981. The Great Communicator understood the value of engendering a feeling of inclusivity among the electorate and he warned Congress of the importance of public opinion, also in 1981, by quoting Teddy Roosevelt’s message to Congress 80 years prior, “The American people are slow to wrath but when their wrath is once kindled, it burns like a consuming flame.” The aftermath of the Great Recession has bred a new strain of voter: young, confused and dissatisfied with their vision of the future. The internet is greasing the wheel of mobilization as circumstance drives voters to wonder what factors are behind the country’s predicaments and how they can be changed.
A Gallup poll conducted in July 2011 posed the following question to Americans: What do you think is the most important problem facing this country today? The top three responses were “economy in general”, “jobs”, and “federal debt/deficit”, making up 31%, 27%, and 16% of the responses, respectively. While Obama has recorded some significant coups in terms of the War on Terror and has taken pride in health care legislation passed on his watch, what the vast majority of Americans want is the economy to be back on track. The longer the “Jobless Recovery” continues, the less relevant other topics become.
We believe that a strong dollar is the first step to rejuvenating American confidence. 71% of GDP is consumption and a stronger dollar increases purchasing power. GDP growth has strengthened sequentially as the greenback appreciated and we expect that to continue. Politicians in Washington need to recognize the strong dollar and the impact it has had on the economy recently. The short term impact for jobs has been unmistakably positive.
Our Chart of the Day highlights this point clearly. The two meaningful positive moves in the US Dollar Index since 2009 have coincided with improvements in employment growth. One of the many positives of democracy is that, in the end, the mandate is made clear. The People’s directive to Washington, D.C. is to create jobs. Economists that debate the optimal method by which to achieve this end are not incentivized to compromise. There are neither direct consequences of their words nor any clock hurrying them through their thought processes. Politicians are not being afforded such shelter from scrutiny. To compromise is the most human of actions and, whether they like it or not, many political figures in Washington are going to be forced to do just that from now on. The circumstances – and the People – demand it.
Have a great weekend,